LSTA Warns Of Safety-Kleen Claims Backlog

The Loan Syndications and Trading Association has warned that the large logjam in Safety-Kleen litigation proceeds stuck in the marketplace threatens to harm liquidity and transparency of the loan market.

The Loan Syndications and Trading Association has warned that the large logjam in Safety-Kleen litigation proceeds stuck in the marketplace threatens to harm liquidity and transparency of the loan market. The LSTA has issued a legal advisory, urging market participants that have refused to transfer proceeds to buyers of Safety-Kleen debt, as required under LSTA standard terms and conditions, to do so immediately. It hopes that by publicizing the issue it can persuade the market to sort out the problem. Elliot Ganz, general counsel for the association, admits, however, that the association's status as a trade group gives it no legal authority.

The impasse stems from the refusal of certain sellers of Safety-Kleen debt to transfer litigation proceeds unless buyers release their claim to any further liabilities associated with the litigation. Under the LSTA's purchase and sale agreement documentation, buyers are not required to do so. Ganz said he has heard anecdotally that hundreds of trades have not closed, while in other cases, the trades have closed but the proceeds have not been transferred. Ganz said it is impossible to know exactly how many trades are stuck because this is private information.

One distressed trader said that the LSTA's move to publicize the issue might push some sellers to pass on litigation proceeds, but he anticipates a lot will ignore it. Sellers that have refused to pass on litigation proceeds reportedly include hedge funds Angelo Gordon and Baupost Group, according to a source familiar with the situation. Officials at Angelo Gordon did not return calls seeking comment. A spokeswoman at Baupost declined to comment. Calls to a spokesman at Safety-Kleen were also not returned.

The litigation proceeds stem from a lawsuit between Safety-Kleen's former auditor PricewaterhouseCoopers and the banks that funded a loan to finance the takeover of Safety-Kleen by Laidlaw Environmental Services in 1998. The merged company, Safety-Kleen Services, filed for bankruptcy two years later. Banks, led by Toronto Dominion, filed the lawsuit claiming that the auditor failed to expose the poor financial state of Safety-Kleen at the time of the takeover. PricewaterhouseCoopers paid approximately $90 million in compensation to settle the lawsuit in November 2004.